CHAPTER 4 SOLUTIONS
Part I
1.
2.
3.
4.
5.
6.
7.
T
T
F
T
F
T
F
8.
9.
10.
11.
12.
13.
14.
T
T
F
F
T
T
T
Part II
15.
16.
17.
18.
19.
20.
F
F
F
T
F
T
1.
2.
3.
4.
5.
6.
7.
f
s
h
l
g
b
o
8.
9.
10.
11.
12.
13.
14.
t
d
e
a
c
r
p
15.
16.
17.
18.
19.
20.
m
n
i
q
k
j
Part III
1. (d)
When the overhead applied to jobs or products during the period is more than the actual
overhead incurred, overhead is said to be overapplied.
2. (b)
The high-low method bases its solution on only two observation points and assumes that
all other observation points will fall along the straight-line drawn between these two
points. The scattergraph method is a visual method which allows for the identification of
outliers.
3. (a)
There should be a high degree of correlation between the base being used and the type of
overhead cost incurred. Answers (b), (c), and (d) are examples of bases that frequently are
used.
4. (c)
When implementing an activity-based costing system, the non-volume related activities
must be first identified. Once they are identified, the costs of these activities must be
estimated. After a cost driver is selected for each activity cost pool, an overhead rate may
be computed.
5. (c)
The machine hour method is considered the most accurate method of applying overhead in
a highly automated environment.
6. (d)
Activity-based costing is the method that considers non-volume-related activities that
create overhead costs, such as machine setups and design changes, as well as volumerelated activities, such as labor hours and machine hours.
7. (d)
A service department renders a service that contributes in an indirect manner to the
manufacture of the product but that does not itself change the shape, form, or nature of the
material that is converted into the finished product.
8. (b)
All of the other departments listed are production departments.
9. (a)
To charge each department with its fair share of an expense, a base using some factor
common to all departments must be found. Therefore, the number of employees would
be a good base to use for allocating the cost of operating the human resources
department because the more employees a department has, the more it would be expected
to use the resources of the HR department.
10. (a)
The direct distribution method allocates service department costs to production
departments only, thus being the least precise method of distribution.
S–12
Chapter Four
Solutions
Part IV
High volume .........................................
Low volume ..........................................
Difference .............................................
Machine
Hours
720
320
400
Electricity
Expense
$38,000
22,000
$16,000
Variable cost per machine hour: $16,000 ÷ 400 = $40
Fixed cost:
Cost at low volume........................................
Variable cost (320 × $40) ..............................
Fixed cost.......................................................
$22,000
12,800
$ 9,200
OR
Fixed cost:
Cost at high volume.......................................
Variable cost (720 × $40) ..............................
Fixed cost.......................................................
$38,000
28,800
$ 9,200
S–13
Part V
Total
Production Departments
Preparation
$6,000
Distribution of service
departments:
Utilities:
70% metered hours* ....
(30%)
30% sq. footage**........
(36%)
Mixing
$5,700
1,512 a (36%)
778
(26%)
Service Departments
Packaging
$6,950
Utilities
$7,200
(50%)
2,395
(25%)
(14%)
706
(5,040) (10%)
504)
(6%)
302)
(4%)
202)
562
(24%)
518
(2,160) (4%)
86)
(2%)
43)
(8%)
173) b
(10%)
479)
(5%)
239)
1,198
(10%)
479
$4,790)
$(4,790)
$3,699)
Materials handling .........
(45%)
1,664
(35%)
1,295
(20%)
740
Factory office .................
(50%)
1,594
(40%)
1,276
(10%)
319
$35,500
$13,943
$11,845
500,000
300,000
$9,712
Bases:
Pounds handled ..............
Direct labor costs ...........
Rates .................................
*$7,200 × .70 = $5,040
**$7,200 × .30 = $2,160
a
1,500 ÷ 5,000 × $5,040 = $1,512
b
4,000 ÷ 50,000 × $2,160 = $173
$10,000
$.0279 per
pound handled
Factory
Office
$2,575
1,814
$7,200)
Maintenance ...................
Maintenance
$4,200
Materials
Handling
$2,875
$.0395 per
pound handled
97.12% of
direct labor cost
$3,189)
$(3,699)
$(3,189)
Chapter Four
Solutions
Part VI
Cost of Job 007:
Direct materials ................................................................................
Direct labor.......................................................................................
Factory overhead:
Material handling (400 tons × $20/ton) .....................................
Machine usage (200 hrs. × $40/hr.) ...........................................
Machine setups (2 setups × $1,000/setup) .................................
Inspections (10 hrs. × $50/hr.)………………………………..
Design changes (1 design change × $2,000/change) .................
Total cost ..........................................................................................
$ 10,000
4,000
8,000
8,000
2,000
500
2,000
$34,500
S–15